China’s homegrown beauty brands ride

the Guo Chao wave

Yijin Han, Senior Analyst - Equities, Eastspring Investments, China

Powered by favourable demographics, higher from less than 40% in 2017 to 72% by December
disposable income and social media channels, 20181 – a testament to the Guo Chao trend in
China’s beauty industry is experiencing China’s fast-growing cosmetics market.
rapid growth. With the right strategies,
China’s cosmetics brands should be able to According to Euromonitor International, cosmetics
capitalise on the Guo Chao trend and give sales in China, in 2018, amounted to RMB 410
the international brands a run for their billion (USD 62 billion) – making it the second
money; especially in the post-Covid era where largest cosmetics market in the world (see Fig. 1a).
consumers spend a greater amount of time Still, China’s beauty spending per capita of RMB
online searching for more value-for-money 295 (USD 42) is very low compared to that of
products. other major markets (USD 300)2. The low base
explains why China’s beauty spending is expected
Nowadays, more Chinese youngsters are wearing to increase at an annual growth rate of 8.2%
and buying China’s homegrown brands. The between 2019 and 2023 – the fastest in the world
Chinese media have consistently referred to this (see Fig. 1b). With the average gross margin of
trend or Guo Chao as a form of ‘cultural self- companies in China’s beauty and personal care
confidence’ which stems from the county’s growing industry ranging between 60% to 70%3, this
economic power and cultural might. booming market presents a lucrative opportunity
for China’s homegrown cosmetic brands.
China’s homegrown cosmetics industry is at the
forefront of the Guo Chao trend. A 2019 study SECULAR GROWTH DRIVERS
by Gartner found that the percentage of China’s ---------------
beauty brands using ‘made-in-China’-related Behind this phenomenal potential is China’s
keywords for their online product listings increased structural demand for cosmetics. Beauty products

Source: 1Gartner: 5 Digital China Cosmetics Trends, March 2019. 2Euromonitor International 2019 and various sources gathered by Eastspring Investments, Feb-
ruary 2020. 3Bloomberg, data as at 28 February 2020. Gross profit margins range of Proya Cosmetics, Guangdong Marubi Biotechnology and Shanghai Jahwa
United (from 2016 to 2019).
 Fig 1: Top cosmetics markets and expected growth

Source: Euromonitor International 2019, based on 2018 exchange rate: CNY/USD.

Fig. 2: Skincare process (% respondents taking the following steps) in China

78% 100% 75% 100% 100% 19% 90% 100% 69%

Makeup Facial Mask Toner Eye Cream Face Serum Moisturiser Sun
Remover Cleanser Treatment Oil Cream

Source: OC&C: Unmasking the secrets of Chinese beauty. Page 5.

have become more of a consumer staple, rather has historically been influenced by the Western,
than just a discretionary purchase. In this regard, Japanese and Korean cultures. This is especially
Chinese millennials use significantly more skincare prominent in the Tier-1 and Tier-2 cities, where
products (see Fig. 2), and also start using such international giants have a daunting array of
products at a younger age than their parents. advantages: substantial financial resources as well
as experience in research and development of high
With greater disposable income and aspirations value-added skincare products.
to live a fashionable lifestyle, China’s younger
generation is more willing to buy premium beauty That said, the behaviour of China’s cosmetics
products, especially for colour cosmetics, which are consumers is dynamic. As such, domestic brands can
easily driven by aesthetic trends. Fig. 3 shows that have an edge over foreign brands in understanding
the sales growth of such products is significantly consumer needs and local nuances.
higher compared to mass-market products.
This is in line with the Guo Chao trend, in which
THE RISE OF HOMEGROWN BRANDS homegrown brands can look to strengthen their
--------------- market visibility and presence.
To date, China’s beauty market is still dominated
by foreign brands, as Chinese consumer behaviour
 Fig. 3: Annual growth rates of China’s cosmetics sales

Source: Euromonitor International 2019.

As Fig 4 shows, Shanghai Pehchaolin Daily Chemical markets are already dominated by international
– a privately-owned cosmetics chemicals company giants. There will be more and better opportunities
which produces and sells cosmetics and perfumes – if they target smaller and lower-tier cities – a
broke into 2016’s top 10 cosmetics brands (in terms marketplace which, to-date, is relatively untapped
of retail sales value). Then, in 2019, it became the by foreign brands. When doing so, they should
eighth largest cosmetics company in China. For the highlight their strong Chinese origins and position
most part, the company’s success has come from themselves as pioneers in the different beauty care
its strong product development and partnerships segments. These segments include:
with online sales platforms. For example, during this Daily skincare: toners, facial masks, cleansers
year’s 618 shopping carnival, Pehchaolin reportedly and makeup remover form a key part of
took just 15 minutes to register a 300% year-on- consumers’ skincare routines. The demand for
year increase4 in sales turnover on JD.com – the these products is more inelastic as customers
second largest business-to-consumer e-commerce focus more on functionality rather than efficacy.
platform in China. With lower price points and R&D thresholds, and
low penetration of international giants, domestic
start-up brands in this area can take advantage
Homegrown brands continue to gather momentum,
of local nuances to increase sales volume
accounting for 56% of China’s cosmetics market,
according to research by the Hong Kong Trade Niche products: once a unique ingredient is
successfully purified for integration into various
Development Council5. Still, the market remains
skincare products – such as stock solutions,
fragmented and it may take some time for
ampoules or essential oils – the ingredient
homegrown brands to wrest control of the market becomes a niche product. The beauty brand that
from foreign brands. comes up with the niche product becomes a
‘price setter’ and enjoys higher profit margins;
NICHE SEGMENTS
Speciality stores: Cosmetics speciality stores
--------------- are popular in lower-tier cities. In general, a
To thrive in this era of Guo Chao, domestic brands single brand store keeps an inventory of 200-
need to look beyond Tier-1 and Tier-2 cities. These 300 stock-keeping units (SKUs). Leveraging

Source: 4Southern Metropolis Daily’s research, citing JD.com data, 19 June 2020. 5HKTDC Research: China’s Cosmetics Market, 12 July 2019.
Fig. 4: Top cosmetics brands (companies) in China by retail sales value

Source: Euromonitor International 2020. Note: Red indicates China’s domestic brands.

cheaper rent, these stores are usually bigger modern looks. Unlike skincare products,
and, also provide beauty services to boost sales. colour cosmetics are more subject to ‘impulse
Furthermore, a customer loyalty programme can buying’ and are easily driven by aesthetic trends.
also more effectively capitalise on clients. Brand history is relatively unimportant, whilst a
great social media marketing campaign is the key
Colour cosmetics: Within China’s beauty to success.
and personal care market, colour cosmetics is
considered one of the most dynamic beauty
Domestic brands which can strengthen their
care categories, given China’s image conscious
positioning in the above segments will be able to
younger generation. China’s sophisticated
original equipment manufacturers (OEM) capitalise on the Guo Chao trend; this, in turn, will
solutions for colour cosmetics allow domestic lead to more sustainable growth and an expanded
players to produce formulas and textures for market share.
consumers who wish to explore new and
HARNESSING ONLINE PLATFORMS to promote certain products, are highly influential
--------------- amongst millennials and play an important role in
E-commerce and social media are accelerating the bridging the gap between cosmetics brands and
Guo Chao trend. Online channels, for instance, have consumers by explaining the importance of skincare
allowed fledging homegrown brands, which have regimen and make-up application as a form of good
limited financial resources to secure shelf space to social etiquette.
sell beauty products directly to customers across
the country. Back in 2010, online sales represented Case in point: In November 2019, as beauty
about 3.1% of the cosmetics sales in China. But in influencer Austin Li Jiaqi (who has earned himself
2019, they represented 33.6% of the cosmetic and the moniker of ‘Lipstick King’) discussed a
skincare sales across the country (see Fig. 5), while homegrown brand’s premium serum facial mask
sales through traditional brick-and-mortar channels on his live-streaming channel, more than 400,000
have continued to decline. boxes of the product were sold online in just 8
minutes and 12 seconds6.
The power of social media is another key factor.
Chinese cosmetics influencers (or key opinion AN EXPANDING UNIVERSE
leaders) are continually building a community by ---------------
sharing their daily beauty routines on Weibo (the With Chinese consumers constantly being
Chinese equivalent of Twitter), Xiaohongshu (a encouraged to try new brands and buy more quality
popular e-commerce social media platform), and skincare and cosmetics products, more domestic
via live-streaming broadcasts on various social players are emerging in China’s booming beauty
platforms. These opinion leaders, generally paid market to compete with the global giants.

Fig. 5: Breakdown (%) of China’s cosmetics & skincare products sales by different distribution channels

Beauty Specialist Retailers Department Stores Direct Selling

60% E-Commerce Super & hypermarkets

50%

40%

30%

20%

10%

0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Euromonitor International 2020.

Source: 6Chicmax Group’s official announcement, data 14 January 2020.

For domestic brands with innovative and niche China’s cosmetics market remains complex and
products but limited exposure to the younger fragmented, and many cosmetics brands are still
generation, Guo Chao provides an avenue to refresh privately owned. Currently only three out of China’s
and enhance their brand image. The coronavirus top 10 homegrown cosmetics brands are listed7.
outbreak, which has largely been contained in However, the increasing financial resources needed
China, has encouraged a greater number of for research and development are likely to compel
consumers to shop online and search for more more private companies to be listed on the stock
money-for-value products. China’s digital-savvy exchange. An expanded investment universe will
make-up brands are thus perfectly positioned to offer greater opportunities for discerning investors.
take advantage and face down their foreign rivals.

That said, although high-end beauty products

can command higher profit margins, they require
significantly more upfront investment outlay for
research and development, along with recurrent
costs and marketing expenses to safeguard the
brand name and its niche products. Indeed, a single
wrong product or marketing decision can cause
substantial losses. On the other hand, if a domestic
brand can cater to users’ specific requirements and
partner with OEM manufacturers for large-scale
production of a niche product, the chances of
success will be higher.

Source: 7Bloomberg, as at 28 February 2020: Proya Cosmetics, Shanghai Jahwa and Guangdong Marubi Biotechnology.
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